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  • Corporate Tax

Residency definition

A company is tax resident in Kenya if:

  1. It is incorporated under Kenyan law.
  2. The management and control of its affairs are exercised in Kenya for any given year of income; or
  3. If the Cabinet Secretary in charge of the National Treasury declares the company to be tax resident for a particular year of income in a notice published in the Kenya Gazette.

Note: A different residency test exists under the double tax treaties entered into with Kenya.

 

Allowable expenses

Subject to certain restrictions, all expenditure which is wholly and exclusively incurred in the production of that income shall be deducted in arriving at the taxable income including capital allowances and investment deductions. Besides the normal revenue expenses the following expenses have been specifically allowed against business profits:

  • Specific bad debts written off but subject to meeting some set criteria;
  • Capital allowances (as investment incentives);
  • Pre-operating expenses;
  • Legal fees incurred on leases for premises used for business;
  • Legal and other costs incurred on listing on securities exchange in Kenya;
  • Subscriptions to trade associations;
  • Capital expenditure on farmlands;
  • Structural alterations to premises incurred by the landlord where such expenditure is necessary to maintain the existing rent;
  • Diminution of loose tools;
  • Expenditure on scientific research;
  • Interest paid to generate investment income;
  • Club subscriptions paid for employees;
  • Sums contributed national retirement benefit schemes;
  • Expenditure, which the commissioner considers just and reasonable, incurred on advertising and promoting goods and services provided by that business;
  • Operating and finance lease payments paid by the lessee under a lease contract where the title of the asset leased always remains with the lessor;
  • Donations made subject to certain conditions; and
  • Realised foreign exchange gains or losses.
  • Effective 01July 2016 expenditure incurred to sponsor sports, with prior approval of the sports cabinet secretary, is allowable
  • Effective 3rd April 2017 Expenditure  incurred  in  that  year  of  income  on donations  to  the  Kenya  Red  Cross,  county governments or any other  institution responsible for the  management  of  national  disasters  to  alleviate the  effects  of  a  national  disaster  declared  by  the President.

The following expenses are specifically disallowed:

  • Non-business and personal expenses (expenses not wholly and exclusively incurred in the production of income);
  • Expenditure or loss which is recoverable under an insurance contract;
  • All donations with the exception of those specified above;
  • School fees;
  • All legal fees with the exception of those specified above;
  • Legal and other professional fees of a capital nature e.g. in relation to borrowings, stamp duty, valuation e.t.c);
  • General and other provisions for bad debts;
  • Other general provisions;
  • Capital expenditure, or any loss, diminution or exhaustion of capital;
  • Capital repairs and maintenance of buildings;
  • Taxes paid;
  • Employer pensions contributions exceeding prescribed limits;
  • Unrealised foreign exchange losses;
  • Interest expenses for thinly capitalized companies;
  • Depreciation and amortisation.

Specified Sources of Income

There are seven specified sources of income (“specified sources”).Profits derived from one of the seven sources shall be computed separately from profits derived from any of the other specified sources and losses incurred in any specified source can only be offset against income from the same source. The seven sources are:

  • Business income;
  • Rent;
  • Employment and self employment professional income;
  • Income from agricultural activities;
  • Surplus funds from pension schemes;
  • Investment income - dividends and interest; and
  • Capital gains tax

 

Branches of non-resident companies are taxable on all their incomes derived from or accrued in Kenya. In determining the profits of a branch, interest, royalties or management or professional fees paid to the head office are not tax deductible.  However withholding tax does not apply to the above payments and after tax profit remittances likewise does not attract withholding tax.

Capital Allowances

This is computed on machinery, motor vehicles and other equipment as explained below:

Nature of allowance

Rate

 

Class I: - Tractors, combine harvesters, heavy earth-moving equipment and similar heavy self-propelling machines (lorries over 3 tonnes included by practice)

37.5%

Class II: Computers hardware, calculators, copiers and duplicating machines

 

30%

 

Class III: Motor vehicles and aircrafts

 

25%

Class IV: All other machinery, furniture, fittings and office equipment)

 

12.5%

Telecommunications equipment purchased and used by a telecoms operator – straight line

 

20%

Any  implement, utensils or similar article, not being machinery or plant, employed in the production of gains or profits

33.3%

Computer software (calculated on cost) – straight line

20%

 Fibre optic cable – straight line

5%

Concessionary arrangements on machinery for construction of roads, bridges or similar infrastructure

Equally over the concessionary period

Industrial building allowance

Between 10% to 100% depending on use

Investment deduction - on eligible cost of buildings and machinery used for manufacture

100% in the first year of use

Investment deduction-On  the  construction  of  a  building  or  purchase  and  installation  of machinery outside the City of Nairobi or the Municipalities of Mombasa or  Kisumu  whereof  the  value  of  the  investment  is  not  less  than  two hundred million shillings 150%

Shipping investment allowance

Effective 1st January 2018 Capital expenditure on buildings and machinery for use in a Special Economic Zone shall be entitled to Investment deduction equal to one hundred percent of the capital expenditure.

40% in first year and 10% in next six years

Business with non-resident persons, transfer pricing and anti tax avoidance provision

The Commissioner is empowered to adjust profits accruing to a Kenyan resident where such a person   enters into transactions with non-resident related parties and the transactions are such that they produce either no profits or less than the ordinary profits which might be expected to accrue to the resident person if the transactions had been conducted by independent persons dealing at arm’s-length. The Act also gives powers to the Minister to issue guidelines for the determination of the arm’s-length value of a transaction.

 The Income Tax Transfer Pricing Rules of 2006 came into operation on 1 July 2006 and requires related parties to develop an appropriate transfer pricing policy. Branches of foreign companies are also affected by this rule with effect from July 2014. Previously they were exempted.

Tax rates

The current corporate tax rate applicable in Kenya is 30% in the case of resident corporations (i.e. limited liability companies). A non-resident company with a permanent establishment in Kenya is taxed at 37.5%. The tax is computed on the taxable income of a company, having deducted expenses which are wholly and exclusively incurred in the production of income.

There are preferential tax rates available for newly listed companies, pursuant to which the tax rates range from 20% to 27% for a period ranging from three  to five years. The preferential rates depend on the percentage of listed shares made available to the public through the Nairobi Securities Exchange, as follows:

  1. 20% rate if 40% of issued share capital is listed – (for five year period).
  2. 25% rate if 30% of issued share capital is listed – (for five year period).
  3. 27% rate if 20% of issued share capital is listed – (for three year period).

For any other businesses owned by individuals directly or through transparent entities e.g. partnerships, the individuals are taxed on individual tax rates. The individual tax rates are based on a graduated scale ranging from 10% to 30%(see under individual taxation). Monthly income in excess of Kshs. 38,892 earned by an individual would be subject to tax at the highest bracket on the graduated scale (i.e. 30%).

All the non Resident entities are taxed through withholding tax regime.

Thin capitalisation

Thin Capitalisation arises where a company incorporated in Kenya is controlled by a non-resident person and the highest amount of all interest bearing loans to that company at any time during the year are more than three times the sum of the revenue reserves (including accumulated losses) and the issued and paid up capital.

 

Where a company is thinly capitalised, the interest expense is restricted (disallowed). In addition, any foreign exchange loss on such loans is also deferred for tax purposes until the thin capitalization conditions reverse. However branches, banks or financial institutions licensed under the Banking Act are exempt from this provision.

Interest free loans, deemed interest and withholding tax

Where a Kenyan resident company receives an interest free loan from a foreign source the loan will be deemed to be interest bearing at rates specified by the Commissioner.

The effect of this is to charge withholding tax at 15% on the computed deemed interest on a monthly basis.

Carry forward of tax losses

Business losses can be carried forward up to a maximum of ten succeeding years, but an extension may be granted where an application is made to the Minister for Finance giving reasons and evidence as to why the losses could not be extinguished.

For companies in the mining, oil and gas industries, any losses incurred in a year of income can be carried forward indefinitely. These companies are also allowed to carry back tax losses for a period of three years, from the year of income in which the loss arose and operations ceased. There is a requirement for the licensee or contractor to apply to the Commissioner to be allowed the tax loss carry back.

It is therefore important that one plans to utilize the losses to attain maximum tax benefits.

Accounting Periods

The financial period end needs to be agreed at that time of application for tax registration. The Income Tax Act permits incorporated businesses to choose any period end.

However, certain laws e.g. the Banking Act and the Insurance Act require banks and insurance companies to have an accounting period ending on 31 December of each year.

Unincorporated businesses (partnerships and sole proprietors and individuals) are also required to have accounting periods ending on 31 December. Unless required by law e.g. for financial institutions, the first period end for the preparation of audited financial statements can be 18 months from the date of commencement of business.

Tax returns and tax payments

Each corporate entity is required to file a self assessment tax return (SAR) together with a set of audited financial statements within 6 months after the end of the accounting period. The final tax for a year is payable not later than four months after the end of accounting period while advance instalment taxes are due per the table below:

 

Instalment

Due date Rate
First Instalment 4th Month 25%
Second instalment 6th Month 25%
Third instalment 9th Month 25%
Fourth instalment 12th Month 25%
Agricultural Companies    
First Instalment 9th Month 75%
Second instalment 12th Month 25%

 

The basis of assessing instalment tax is the lower of the preceding year’s tax liability multiplied by 110% and the current year’s estimate.

Turnover tax

 

Turnover tax targets business whose annual turnover does not exceed Ksh 5 million. The rate of tax is 3% on the gross receipts but it does not apply to the following business:

  1. Any income whose withholding tax is final;
  2. Rental income;
  3. Professional, management and training fees
  4. Income of incorporated entities

Turnover tax is the final tax.

 

Export Processing Zone Enterprises

EPZ’s are exempt from corporate tax during the first 10 years. Licensing of an EPZ shall not include activities that are commercial in nature but manufacturing.

The corporate tax rate is 25% commencing from the 11th year. However employees and directors, other than non-residents, of an EPZ enterprise are liable to personal income tax.